[Federal Register Volume 69, Number 136 (Friday, July 16, 2004)]
[Proposed Rules]
[Pages 42606-42612]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-16225]


 ========================================================================
 Proposed Rules
                                                 Federal Register
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
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  Federal Register / Vol. 69, No. 136 / Friday, July 16, 2004 / 
Proposed Rules  

[[Page 42606]]



FARM CREDIT SYSTEM INSURANCE CORPORATION

12 CFR Part 1412

RIN 3055-AA08


Golden Parachute and Indemnification Payments

AGENCY: Farm Credit System Insurance Corporation (FCSIC or 
Corporation).

ACTION: Proposed rule.

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SUMMARY: The FCSIC is issuing a proposed rule limiting golden parachute 
and indemnification payments to institution-related parties (IRPs) by 
Farm Credit System institutions, including their subsidiaries, service 
corporations and affiliates. The purpose of the rule is to prevent 
abuses in golden parachute and indemnity payments and to protect the 
assets of the institution and the Farm Credit System Insurance Fund.

DATES: Comments must be received by October 14, 2004.

ADDRESSES: You may send comments by electronic mail through the 
``News'' section of FCSIC's Web site, www.fcsic.gov, or through the 
Governmentwide ``www.regulations.gov'' portal. You may also send 
comments to Dorothy L. Nichols, General Counsel at 
``[email protected]'' or by mail at the address listed below. Copies 
of all comments we receive, may be reviewed in our office in McLean, 
Virginia.

FOR FURTHER INFORMATION CONTACT: Dorothy L. Nichols, General Counsel, 
Farm Credit System Insurance Corporation, 1501 Farm Credit Drive, 
McLean, VA, 22102, 703-883-4211, TTY 703-883-4390, Fax 703-790-9088.

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    No collection of information pursuant to section 3504(h) of the 
Paperwork Reduction Act (44 U.S.C. 3501 et seq.) is contained in the 
proposed rule. Consequently, no information was submitted to the Office 
of Management and Budget for review.

Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act (Pub. 
L. 96-354, 5 U.S.C. 601 et seq.), it is certified that the proposed 
rule will not have significant impact on a substantial number of small 
entities.

Background

    Section 218 of the Farm Credit System Reform Act of 1996 (``Reform 
Act'') amended the Farm Credit Act of 1971 by adding a new section 
5.61B. See Public Law 104-105, Feb. 10, 1996. This section authorizes 
the Corporation to prohibit or limit, by regulation or order, golden 
parachute and indemnification payments. See 12 U.S.C. 2277a-10b. 
Section 5.61B is similar to legislative authorities given to the other 
Federal financial institution regulators. See e.g. 12 U.S.C. 1828(k).
    The terms golden parachute and indemnification payment are defined 
in the statute at 12 U.S.C. 2277a-10b(a)(1) and (2). In general, golden 
parachutes are employment contracts that offer substantial payments 
when employment is terminated. Indemnification payments are often used 
to reimburse officers or directors for personal losses due to judgments 
or litigation costs incurred while exercising official duties. The 
golden parachute portion of the proposed rule applies to any Farm 
Credit System institution seeking to make golden parachute payments 
only when the institution is in a ``troubled condition.'' The 
indemnification part of the proposed rule applies to Farm Credit System 
institutions regardless of their financial condition. Its primary 
purpose is to prohibit reimbursements that benefit wrongdoers. For 
example, an institution could not indemnify officers or directors for 
legal expenses or liabilities that result from a successful Farm Credit 
Administration (FCA) administrative action. However, if the officer or 
director is cleared of the charges, legal fees and costs can be 
reimbursed.

Golden Parachute Prohibition

    The regulation follows the statutory definition of a golden 
parachute payment. It is a payment (or an agreement to make a payment) 
that:
     Is in the nature of compensation by any System institution 
for the benefit of any current or former institution-related party;
     Is based on an obligation that is contingent on 
termination; and
     Is received on or after, or is made in contemplation of 
certain events that signify the System institution is in a troubled 
condition.
    Following the criteria set out in section 5.61B(a)(1) of the Reform 
Act, the proposed rule prohibits golden parachute payments by 
institutions that are insolvent, in conservatorship or receivership, or 
rated a ``4'' or ``5'' in the FCA Financial Institution Rating System. 
Section 5.61B(a)(1)(A) also authorizes the Corporation to define by 
regulation other circumstances that warrant a determination that an 
institution is in a troubled condition.
    The proposed rule defines troubled condition to include any 
institution: (1) Subject to a cease-and-desist order or written 
agreement issued by the FCA requiring it to improve its financial 
condition; (2) subject to an FCA proceeding that may result in an order 
that requires improvement in financial condition; or (3) informed in 
writing by the Corporation that it is in troubled condition based on 
its most recent report of examination or other pertinent information. 
For banks, troubled condition also includes a bank that is: (1) Unable 
to make timely payments of principal and interest on bank-insured 
obligations; or (2) receiving assistance from the Insurance Fund. For 
the Federal Agricultural Mortgage Corporation (``Farmer Mac''), 
troubled condition also includes inability to make timely payments of 
principal and interest on its debt obligations or an inability to 
fulfill its guarantee obligations. The definition of troubled condition 
in the proposed rule is similar to the definition in rules adopted by 
the other Federal financial institution regulators. See e.g., 12 CFR 
359.1(f); 12 CFR 563.555 and 12 CFR 701.14.

Exceptions

    The proposed rule lists eight exceptions to the prohibition on 
golden parachute payments in Sec.  1412.2(f)(2). Four of these are 
listed in the statute: ERISA \1\ qualified retirement plans; 
nonqualified ``bona fide'' deferred or supplemental compensation plans; 
other nondiscriminatory benefit plans;

[[Page 42607]]

and payments made by reason of death or disability. See 12 U.S.C. 
2277a-10b(a)(1)(c).
---------------------------------------------------------------------------

    \1\ Employee Retirement Income Security Act of 1974, as amended. 
(29 U.S.C. 1002(1)).
---------------------------------------------------------------------------

    Nondiscriminatory means a plan or arrangement that applies to all 
employees who meet customary eligibility requirements such as minimum 
length-of-service standards. We understand that many severance plans 
pay somewhat more generous benefits to higher ranking employees. The 
proposed rule would allow a modest disparity in nondiscriminatory 
severance benefits linked to objective criteria like job title or 
length of service. The proposed definition of nondiscriminatory 
specifies a maximum 20 percent in any one criteria, unless a request 
for a larger amount is granted by the Corporation. For example, if 
lower-level employees are provided 50 percent of their yearly salary 
and 1 week of salary for each year of service, higher level employees 
could receive 60 percent of their yearly salary plus 1 week of salary 
for each year of service. Our hope is that this permitted modest 
discrepancy would allow System institutions to offer severance benefits 
that conform to industry norms for nondiscriminatory benefit plans. The 
statute grants the Corporation authority to determine other permissible 
arrangements and four of the eight exceptions in Sec.  1412.2(f)(2) are 
exceptions added by the Board for System institutions. They include 
payments required by state or foreign law and a safe harbor provision.
    Section 1412.2(f)(2)(viii) adds an exception that can be used in 
lieu of paragraph (f)(2)(vii) for severance pay plans or arrangements 
that do not meet the regulatory definition of nondiscriminatory. We 
understand that at times different benefit arrangements may be made 
available to different employees. For example, an institution that is 
experiencing financial trouble may want to terminate some employees 
immediately while providing incentive payments to employees with 
critical functions so as to delay their departures. The proposed rule 
limits payments or arrangements under this exception to 12-months' base 
salary, unless a request for a larger payment is granted by the 
Corporation. Minor deviations in severance benefits that involve 
tangible property would also be permitted. For example, an institution 
may want to give some departing employees their laptops but other 
employees would get no additional benefits. We would not treat this as 
a prohibited golden parachute payment, as long as the cost is 
reasonable and the practice customary. We hope this provision provides 
a workable safe harbor for institutions that want to reward more highly 
compensated employees that have greater responsibilities without 
undermining the intent of the legislation.
    Section 1412.5(a)(2) permits a troubled institution to hire a 
``white knight'', an individual hired to improve the institution's 
condition, and agree to pay a golden parachute payment upon termination 
of employment, provided the institution obtains the prior written 
consent of the FCA and the Corporation. Such an agreement has the 
potential to benefit the institution and the Insurance Fund. We 
recognize that individuals who possess the experience and expertise 
necessary to reverse a troubled institution may not take the job unless 
they receive an agreement for a severance payment reflecting market 
rates, in the event that their efforts are not successful.
    Section 1412.5(a)(3) contains an exception for a change in control. 
System institutions may pay up to 12-month's salary in the event of a 
change of control with the prior consent of the FCA. The Board believes 
1-year's salary should be a sufficient incentive for a senior executive 
to objectively consider a merger that may result in the loss of that 
executive's job at a troubled institution.
    Finally, the proposed rule in Sec.  1412.5(a)(1) sets out a 
procedure to allow System institutions to request authority for what 
would otherwise be a prohibited golden parachute payment. This 
provision recognizes that there may be valid business reasons to seek 
an agreement not covered by any of the express exceptions, which the 
institution believes should not be prohibited. If an institution seeks 
such an authorization, the statute sets out a number of factors that 
the FCA and the Corporation may consider. See 12 U.S.C. 2277a-10b(c). 
The proposed rule at Sec.  1412.5(a)(4) and (b) enumerates the factors 
that the FCA and the Corporation will consider, including whether the 
IRP committed any fraudulent acts, breached a fiduciary duty or played 
a substantial role in the institution's troubled condition. Under the 
proposed rule, the institution making the request should address the 
factors specified in the rule so that the FCA and the Corporation can 
consider whether the requested payment would be contrary to the intent 
of the prohibition. The institution should include any information of 
which it has knowledge that indicates there is a reasonable basis to 
believe that the IRP satisfies any of the criteria set out in Sec.  
1412.5(a)(4) and (b). If the applicant is not aware of any such 
information, it shall certify that it is not.

Indemnification Payments

    The statute prohibits Farm Credit System institutions from making 
an indemnification payment for any liability or legal expense arising 
from an administrative or civil action brought by FCA that results in a 
civil money penalty, removal from office or a prohibition on 
participation in the System institution's business. See 12 U.S.C. 
2277a-10b(a)(2). Institutions may purchase directors and officers 
insurance to cover the legal expenses even if the individual loses the 
legal action and pays settlement costs. See 12 U.S.C. 2277a-10b(e)(l). 
Nevertheless, the institution cannot use directors and officers 
insurance to pay the civil money penalty.
    The proposed rule, at Sec.  1412.2(l), follows the definition of a 
prohibited indemnification payment set out in the statute. It includes 
any payment or agreement to pay an institution-related party for any 
civil money penalty or judgment resulting from an administrative or 
civil action brought by FCA where the person must pay a civil money 
penalty, is removed from office or is subject to a cease and desist 
action. There are two exceptions in the proposed rule. The first allows 
System institutions to purchase commercial insurance to cover expenses 
other than judgments and penalties. Second, the proposed rule permits a 
partial indemnification. If there has been a finding that clears the 
individual, indemnification is permitted for the legal or professional 
expenses attributable to these charges. In addition, Sec.  1412.6 sets 
out criteria for permissible ``up front'' indemnification payments. The 
System institution's board of directors must determine that the party 
requesting indemnification acted in good faith. Also, the payment 
cannot materially adversely affect the institution's safety and 
soundness. Finally, the party must agree to reimburse the institution 
for advanced indemnification payments if they become prohibited 
payments later, due to an unfavorable ruling.

Farm Credit System Institutions

    The prohibitions in 12 U.S.C. 2277a-10b apply to all Farm Credit 
System institutions. The proposed rule at Sec.  1412.2(b) defines Farm 
Credit System institutions to include all associations, banks, service 
corporations and their subsidiaries and affiliates, except the Farm 
Credit Financial Assistance Corporation. It also includes Farmer Mac 
and its subsidiaries and affiliates,

[[Page 42608]]

which is described in 12 U.S.C. 2279aa-1(a)(2) as an institution of the 
Farm Credit System. Furthermore, 12 U.S.C. 2277a-10b(b) specifies that 
the prohibition on golden parachute and indemnity payments was meant to 
include all Farm Credit System institutions, including even a 
conservatorship or receivership of Farmer Mac. The legislative history 
of the Reform Act makes this point clear. It states: ``New subsection 
(a) provides that FCSIC has authority to prohibit or limit golden 
parachutes or indemnifications, including the Federal Agricultural 
Mortgage Corporation (Farmer Mac).'' H.R. Rep. 104-421, 104th Cong., 
1st Sess. 12 (1995).

Institution-Related Party

    The proposed rule prohibits certain golden parachute and 
indemnification payments made to or for an institution-related party. 
The term institution-related party (IRP) is defined in the statute at 
12 U.S.C. 2277a-10b(a)(3). It includes directors, officers, employees 
or agents for a Farm Credit System institution, stockholders (other 
than another Farm Credit System institution), consultants, joint 
venture partners and any one else who FCA determines has participated 
in the affairs of the institution. Additionally, IRPs include 
independent contractors, including attorneys, appraisers or 
accountants, that knowingly or recklessly participate in an unsafe or 
unsound practice that caused or is likely to cause harm to the 
institution. We will examine very closely any attempt by a Farm Credit 
System institution to avoid the regulation by employing the IRP in some 
other capacity (e.g., a consultant) and calling the arrangement 
consulting compensation rather than a severance payment or golden 
parachute.

Receivership Issues

    Section 1412.8 explains that this regulation is not meant to bind 
any receiver of a failed Farm Credit System institution. The fact that 
FCSIC or FCA consents to a particular payment does not mean that the 
approving entity or the receiver will be responsible for making the 
payments in the event of a receivership or that the recipient will 
receive some sort of preference over other creditors from the 
receivership.

Enforcement

    The statute at 12 U.S.C. 2277a-10b(b) grants the FCSIC authority to 
prohibit golden parachute and indemnity payments by regulation or 
order. The Board believes that a regulation proscribing limits, 
defining ``troubled condition'' and setting out procedures for seeking 
approval of a payment that is not specified in one of the exceptions is 
usually preferable to a case-by-case approach. Nevertheless, FCSIC 
could deal with abuses on a case-by-case basis through an enforcement 
proceeding.
    The proposed regulation is similar to the regulations of the other 
Federal financial regulators with similar statutory authority. See, 
e.g., 12 CFR part 359. Rather than prohibit all the golden parachute 
payments above a certain threshold, the proposed regulation allows a 
Farm Credit System institution that is in a troubled condition, as 
defined in the regulation, to seek approval for an otherwise prohibited 
golden parachute payment to an IRP. Similarly, the proposal rule on 
indemnity payments seeks a rational and fair approach for determining 
indemnification in order to avoid abuses.
    The statute at 12 U.S.C. 2277a-10b(c) provides that FCSIC ``shall 
prescribe, by regulation, the factors to be considered by the 
Corporation in taking any action under subsection (b) [its authority to 
prohibit or limit golden parachute payments and indemnity payments]. 
The section also sets out a number of illustrative factors that may be 
considered when taking action under subsection (b): For Example, 
whether an IRP has committed acts of fraud, breach of fiduciary duty, 
or insider abuse that has had a detrimental effect on the financial 
condition of the institution; whether there is a reasonable basis to 
believe that the IRP has violated the law or regulations; whether the 
IRP was in a position of managerial or fiduciary responsibility; and 
the length of time the party was related to the institution and the 
reasonableness of the compensation. In addition, section 2277a-10b(d) 
specifies that certain payments are prohibited. No Farm Credit System 
institution may prepay the salary or any liability or legal expense of 
any IRP if the payment is made in contemplation of insolvency or such 
payment has the result of preferring one creditor over another.
    The Corporation has considered the prohibited payments and the 
illustrative factors in preparing its proposed regulation. It has also 
reviewed the legislative history of the Reform Act and the 
Comprehensive Thrift and Bank Fraud Prosecution and Taxpayer Recovery 
Act of 1990 (the Fraud Act), which added similar authority for the 
Federal Deposit Insurance Corporation in a new section 18(k)(1) to the 
Federal Deposit Insurance Act. Public Law. 101-647, Sec. 2523 (1990). 
The Corporation is aware that the Federal financial regulators have 
encountered abuses with golden parachutes when institutions pay 
substantial sums to top executives who resign after an institution is 
troubled or immediately before the institution is sold. Ultimately, the 
Corporation has concluded that to avoid such abuses golden parachute 
payments should be prohibited for Farm Credit System institutions that 
are in a troubled condition, as defined in the regulation, except under 
the circumstances set forth in the proposed rule. If an institution in 
a troubled condition or an IRP wants to make a payment or enter into an 
agreement that it believes should not be prohibited and the payment or 
agreement is not covered by one of the exceptions specified in the 
regulation, it may seek approval from FCA and FCSIC. When it does, the 
regulation requires the institution or IRP to address some of the 
factors listed in the statute so that the FCA and FCSIC can consider 
them in determining whether the proposed payment or agreement should be 
allowed, limited or prohibited. The Corporation believes this rule will 
best protect the financial integrity of the institution and safeguard 
its assets as Congress intended.
    In issuing the proposed indemnification rule, the Corporation has 
considered the prohibited payments and the illustrative factors set out 
in the statute as well as the legislative history. The Corporation 
believes that individuals that violate the law or regulations should 
pay penalties out of their own pockets and not be reimbursed by a Farm 
Credit System institution. The Corporation believes that this proposed 
regulation on indemnification payments preserves the deterrent effects 
of administrative enforcements and civil actions even though it does 
not prohibit all indemnification payments.
    As noted, the proposal sets forth circumstances under which 
indemnification payments may be made. For example, the Corporation has 
decided to allow indemnification ``up front'' for an IRP's legal or 
other professional expenses if: (1) Its board of directors determines 
that the party requesting indemnification acted in good faith, (2) the 
payment will not materially adversely affect the institution, and (3) 
the person agrees in writing to reimburse the institution if the 
alleged violations of law, regulation or fiduciary duty are upheld. If 
these criteria are met, the institution's board of directors will have 
concluded in good faith that the party requesting indemnification did 
not commit a fraudulent act, insider abuse or some other actionable 
offense that had a material adverse effect on the financial

[[Page 42609]]

condition of the institution. Consideration of these factors in this 
regulatory requirement is what Congress intended FCSIC to do in taking 
action under section 5.61B(b) and (c) (12 U.S.C. 2277a-10b(b) and (c)). 
Also, the Corporation has decided to permit partial indemnification for 
that portion of the liability or legal expenses incurred where there is 
a determination on part of the charges in favor of the IRP. Finally, an 
institution may purchase insurance to cover expenses other than 
judgments or penalties.
    FCSIC's authority to regulate golden parachutes and indemnity 
payments is in addition to FCA's safety and soundness enforcement 
authority pursuant to the Farm Credit Act of 1971, as amended. 
Furthermore, nothing in this regulation limits the powers, functions, 
or responsibilities of the FCA.

List of Subjects in 12 CFR Part 1412

    Banks, banking, Golden parachute payment, Indemnification payment, 
Institution-related party, Penalties, Prohibitions.

    For the reasons set out in the preamble, 12 CFR part 1412 is 
proposed to be added as set forth below.

PART 1412--GOLDEN PARACHUTE AND INDEMNIFICATION PAYMENTS

Sec.
1412.1 Scope.
1412.2 Definitions.
1412.3 Golden parachute payments prohibited.
1412.4 Prohibited indemnification payments.
1412.5 Permissible golden parachute payments.
1412.6 Permissible indemnification payments.
1412.7 Filing instructions.
1412.8 Applicable in the event of receivership.

    Authority: 12 U.S.C. 2277a-10b.


Sec.  1412.1  Scope.

    (a) This regulation limits and/or prohibits, in certain 
circumstances, the ability of Farm Credit System (System) institutions, 
their service corporations, subsidiaries and affiliates from making 
golden parachute and indemnification payments to institution-related 
parties (IRPs).
    (b) This regulation applies to System institutions in a troubled 
condition that seek to make golden parachute payments to their IRPs.
    (c) The limitations on indemnification payments apply to all System 
institutions, their service corporations, subsidiaries and affiliates 
regardless of their financial health.


Sec.  1412.2  Definitions.

    (a) Act or Farm Credit Act means Farm Credit Act of 1971 (12 U.S.C. 
2002(a)), as amended by the Farm Credit System Reform Act of 1996, 
amending 12 U.S.C. 2277a-10.
    (b) Farm Credit System institution or System institution means any 
``institution'' enumerated in section 1.2 of the Act including, but not 
limited to, associations, banks, service corporations, the Federal Farm 
Credit Banks Funding Corporation, the Farm Credit Leasing Services 
Corporation and their subsidiaries and affiliates, as well as, the 
Federal Agricultural Mortgage Corporation and its subsidiaries and 
affiliates, as described in 12 U.S.C. 2279aa-1(a).
    (c) Benefit plan means any plan, contract, agreement or other 
arrangement which is an ``employee welfare benefit plan'' as that term 
is defined in section 3(1) of the Employee Retirement Income Security 
Act of 1974, as amended (29 U.S.C. 1002(1)), or other usual and 
customary plans such as dependent care, tuition reimbursement, group 
legal services or other benefits provided under a cafeteria plan 
sponsored by the System institution; provided however, that such term 
shall not include any plan intended to be subject to paragraph 
(f)(2)(iii), (vii) and (viii) of this section.
    (d) Bona fide deferred compensation plan or arrangement means any 
plan, contract, agreement or other arrangement whereby:
    (1) An IRP voluntarily elects to defer all or a portion of the 
reasonable compensation, wages or fees paid for services rendered which 
otherwise would have been paid to such party at the time the services 
were rendered (including a plan that provides for the crediting of a 
reasonable investment return on such elective deferrals) and the System 
institution either:
    (i) Recognizes compensation expense and accrues a liability for the 
benefit payments according to generally accepted accounting principles 
(GAAP); or
    (ii) Segregates or otherwise sets aside assets in a trust which may 
only be used to pay plan and other benefits, except that the assets of 
such trust may be available to satisfy claims of the System 
institution's creditors in the case of insolvency; or
    (2) The System institution establishes a nonqualified deferred 
compensation or supplemental retirement plan, other than an elective 
deferral plan described in paragraph (d)(1) of this section:
    (i) Primarily for the purpose of providing benefits for certain 
IRPs in excess of the limitations on contributions and benefits imposed 
by sections 415, 401(a)(17), 402(g) or any other applicable provision 
of the Internal Revenue Code of 1986 (26 U.S.C. 415, 401(a)(17), 
402(g)); or
    (ii) Primarily for the purpose of providing supplemental retirement 
benefits or other deferred compensation for a select group of 
directors, management or highly compensated employees (excluding 
severance payments described in paragraph (f)(2)(v) of this section and 
permissible golden parachute payments described in Sec.  1412.5); and
    (3) In the case of any nonqualified deferred compensation or 
supplemental retirement plans as described in paragraphs (d)(1) and (2) 
of this section, the following requirements shall apply:
    (i) The plan was in effect at least 1 year prior to any of the 
events described in paragraph (f)(1)(ii) of this section;
    (ii) Any payment made pursuant to such plan is made in accordance 
with the terms of the plan as in effect no later than 1 year prior to 
any of the events described in paragraph (f)(1)(ii) of this section and 
in accordance with any amendments to such plan during such 1 year 
period that do not increase the benefits payable thereunder;
    (iii) The IRP has a vested right, as defined under the applicable 
plan document, at the time of termination of employment to payments 
under such plan;
    (iv) Benefits under such plan are accrued each period only for 
current or prior service rendered to the employer (except that an 
allowance may be made for service with a predecessor employer);
    (v) Any payment made pursuant to such plan is not based on any 
discretionary acceleration of vesting or accrual of benefits which 
occurs at any time later than 1 year prior to any of the events 
described in paragraph (f)(1)(ii) of this section;
    (vi) The System institution has previously recognized compensation 
expense and accrued a liability for the benefit payments according to 
GAAP or segregated or otherwise set aside assets in a trust which may 
only be used to pay plan benefits, except that the assets of such trust 
may be available to satisfy claims of the System institution's 
creditors in the case of insolvency; and
    (vii) Payments pursuant to such plans shall not be in excess of the 
accrued liability computed in accordance with GAAP.
    (e) Corporation or FCSIC mean the Farm Credit System Insurance 
Corporation, in its corporate capacity.
    (f) Golden parachute payment. (1) The term ``golden parachute 
payment''

[[Page 42610]]

means any payment (or any agreement to make any payment) in the nature 
of compensation by any System institution for the benefit of any 
current or former IRP pursuant to an obligation of such System 
institution that:
    (i) Is contingent on the termination of such party's primary 
employment or relationship with the System institution; and
    (ii) Is received on or after, or is made in contemplation of, any 
of the following events:
    (A) The insolvency (or similar event) of the System institution 
which is making the payment or bankruptcy or insolvency (or similar 
event) of the service corporation, subsidiary or affiliate which is 
making the payment; or
    (B) The System institution is assigned a composite rating of 4 or 5 
by the FCA; or
    (C) The appointment of any conservator or receiver for such System 
institution; or
    (D) A determination by the Corporation, that the System institution 
is in a troubled condition, as defined in paragraph (m) of this 
section; and
    (iii) Is payable to an IRP whose employment by or relationship with 
a System institution is terminated at a time when the System 
institution by which the IRP is employed or related satisfies any of 
the conditions enumerated in paragraphs (f)(1)(ii)(A) through (D) of 
this section, or in contemplation of any of these conditions.
    (2) Exceptions. The term ``golden parachute payment'' shall not 
include:
    (i) Any payment made pursuant to a pension or retirement plan which 
is qualified (or is intended within a reasonable period of time to be 
qualified) under section 401 of the Internal Revenue Code of 1986 (26 
U.S.C. 401); or
    (ii) Any payment made pursuant to a benefit plan as that term is 
defined in paragraph (c) of this section; or
    (iii) Any payment made pursuant to a ``bona fide'' deferred 
compensation plan or arrangement as defined in paragraph (d) of this 
section; or
    (iv) Any payment made by reason of death or by reason of 
termination caused by the disability of IRP; or
    (v) Any severance or similar payment which is required to be made 
pursuant to a state statute or foreign law which is applicable to all 
employers within the appropriate jurisdiction (with the exception of 
employers that may be exempt due to their small number of employees or 
other similar criteria); or
    (vi) Any other payment which the Corporation determines to be 
permissible in accordance with Sec.  1412.6, on permissible 
indemnification payments; or
    (vii) Any payment made pursuant to a nondiscriminatory severance 
pay plan or arrangement that provides for payment of severance benefits 
to all eligible employees upon involuntary termination other than for 
cause, voluntary resignation, or early retirement. Furthermore, such 
severance pay plan or arrangement shall not have been adopted or 
modified to increase the amount or scope of severance benefits at a 
time when the System institution was in a condition specified in 
paragraph (f)(1)(ii) of this section or in contemplation of such a 
condition without the prior written consent of the FCA; or in lieu of a 
payment made pursuant to this paragraph;
    (viii) Any payment made pursuant to a severance pay plan or 
arrangement that provides severance benefits upon involuntary 
termination other than for cause, voluntary resignation, or early 
retirement. No employee shall receive any payment under this subpart 
which exceeds the base compensation paid to such employee during the 12 
months (or longer period or greater benefit as the Corporation shall 
consent to) immediately proceeding termination of employment. 
Furthermore, such severance pay plan or arrangement shall not have been 
adopted or modified to increase the amount or the scope of the 
severance benefits at a time when the System institution was in a 
condition specified in paragraph (f)(1)(ii) of this section or in 
contemplation of such a condition without the written approval of the 
FCA.
    (g) The FCA means the Farm Credit Administration.
    (h) Institution-related party (IRP) means:
    (1) Any director, officer, employee, or controlling stockholder 
(other than another Farm Credit System institution) of, or agent for a 
System institution;
    (2) Any stockholder (other than another Farm Credit System 
institution), consultant, joint venture partner, and any other person 
as determined by the FCA (by regulation or case-by-case) who 
participates in the conduct of the affairs of a System institution; and
    (3) Any independent contractor (including any attorney, appraiser, 
or accountant) who knowingly or recklessly participates in any 
violation of any law or regulation, any breach of fiduciary duty, or 
any unsafe or unsound practice, which caused or is likely to cause more 
than a minimal financial loss to, or a significant adverse effect on, 
the System institution.
    (i) Liability or legal expense means:
    (1) Any legal or other professional fees and expenses incurred in 
connection with any claim, proceeding, or action;
    (2) The amount of, and any cost incurred in connection with, any 
settlement of any claim, proceeding, or actions; and
    (3) The amount of, any cost incurred in connection with, any 
judgment or penalty imposed with respect to any claim, processing, or 
action.
    (j) Nondiscriminatory means that the plan, contract or arrangement 
in question applies to all employees of a System institution who meet 
reasonable and customary eligibility requirements applicable to all 
employees, such as minimum length of service requirements. A 
nondiscriminatory plan, contract or arrangement may provide different 
benefits based only on objective criteria such as salary, total 
compensation, length of service, job grade or classification, which are 
applied on a proportionate basis, with a modest disparity in severance 
benefits relating to any one criterion of 20 percent.
    (k) Payment means:
    (1) Any direct or indirect transfer of any funds or any asset;
    (2) Any forgiveness of any debt or other obligation;
    (3) The conferring of benefits in the nature of compensation, 
including but not limited to stock options and stock appreciation 
rights; or
    (4) Any segregation of any funds or assets, the establishment or 
funding of any trust or the purchase of or arrangement for any letter 
of credit or other instrument, for the purpose of making, or pursuant 
to any agreement to make, any payment on or after the date on which 
such funds or assets are segregated, or at the time of or after such 
trust is established or letter of credit or other instrument is made 
available, without regard to whether the obligation to make such 
payment is contingent on:
    (i) The determination, after such date, of the liability for the 
payment of such amount; or
    (ii) The liquidation, after such date, of the amount of such 
payment.
    (l) Prohibited indemnification payment. (1) The term ``prohibited 
indemnification payment'' means any payment (or any agreement or 
arrangement to make any payment) by any System institution for the 
benefit of any person who is or was an IRP of such System institution, 
to pay or reimburse such person for any civil money penalty or judgment 
resulting from any administrative or civil action instituted by the 
FCA, or any other liability or legal expense with regard to any

[[Page 42611]]

administrative proceeding or civil action instituted by the FCA which 
results in a final order or settlement pursuant to which such person:
    (i) Is assessed a civil money penalty;
    (ii) Is removed from office or prohibited from participating in the 
conduct of the affairs of the institution; or
    (iii) Is required to cease and desist from or take any affirmative 
action with respect to such institution.
    (2) Exceptions. (i) The term ``prohibited indemnification'' payment 
shall not include any reasonable payment by a System institution which 
is used to purchase any commercial insurance policy or fidelity bond, 
provided that such insurance policy or bond shall not be used to pay or 
reimburse an IRP for the cost of any judgment or civil money penalty 
assessed against such person in an administrative proceeding or civil 
action commenced by the FCA, but may pay any legal or professional 
expenses incurred in connection with such proceeding or action or the 
amount of any restitution to the System institution or receiver.
    (ii) The term ``prohibited indemnification payment'' shall not 
include any reasonable payment by a System institution that represents 
partial indemnification for legal or professional expenses specifically 
attributable to particular charges for which there has been a formal 
and final adjudication or finding in connection with a settlement that 
the IRP has not violated certain FCA laws or regulations or has not 
engaged in certain unsafe or unsound practices or breaches of fiduciary 
duty, unless the administrative action or civil proceedings has 
resulted in a final prohibition order against the IRP.
    (m) Troubled condition means a System institution that:
    (1) Is subject to a cease-and-desist order or written agreement 
issued by the FCA that requires action to improve the financial 
condition of the System institution or is subject to a proceeding 
initiated by the FCA which contemplates the issuance of an order that 
requires action to improve the financial condition of the institution, 
unless otherwise informed in writing by the FCA; or
    (2) Is unable to make a timely payment of principal or interest on 
any insured obligation (as defined in section 5.51(3) of the Farm 
Credit Act; 12 U.S.C. 2277a(3)); or
    (3) Is receiving assistance as described in section 5.61 of the 
Farm Credit Act, 12 U.S.C. 2277a-10; or
    (4) Is unable to make timely payment of principal or interest on 
debt obligations issued under the authority of section 8.6(e)(2) of the 
Farm Credit Act; 12 U.S.C. 2279aa-6(e)(2) or is unable to fulfill the 
guarantee obligations provided under section 8.6 of the Farm Credit 
Act; 12 U.S.C. 2279aa-6; or
    (5) Is informed in writing by the Corporation that it is in a 
``troubled condition'' for purposes of the requirements of this subpart 
on the basis of the System institution's most recent report of 
condition or report of examination or other information available to 
the Corporation.


Sec.  1412.3  Golden parachute payments prohibited.

    No System institution shall make or agree to make any golden 
parachute payment, except as provided in this part.


Sec.  1412.4  Prohibited indemnification payments.

    No System institution shall make or agree to make any prohibited 
indemnification payment, except as provided in this part.


Sec.  1412.5  Permissible golden parachute payments.

    (a) A System institution may agree to make or may make a golden 
parachute payment if and to the extent that:
    (1) The FCA, with the written concurrence of the Corporation, 
determines that such a payment or agreement is permissible; or
    (2) Such an agreement is made in order to hire a person to become 
an IRP either at a time when the System institution satisfies or in an 
effort to prevent it from imminently satisfying any of the criteria set 
forth in Sec.  1412.2(f)(1)(ii), and the FCA and the Corporation 
consent in writing to the amount and terms of the golden parachute 
payment. Such consent by the Corporation and the FCA shall not improve 
the IRP's position in the event of the insolvency of the institution 
since such consent can neither bind a receiver nor affect the 
provability of receivership claims. In the event that the institution 
is placed into receivership or conservatorship, the Corporation and/or 
the FCA shall not be obligated to pay the promised golden parachute and 
the IRP shall not be accorded preferential treatment on the basis of 
such prior approval; or
    (3) Such a payment is made pursuant to an agreement which provides 
for a reasonable severance payment, not to exceed 12-months' salary, to 
an IRP in the event of a change in control of the System institution; 
provided, however, that the System institution shall obtain the consent 
of the FCA prior to making such a payment and this paragraph (a)(3) 
shall not apply to any change in control of System institution which 
results from an assisted transaction as described in section 5.61 of 
the Farm Credit Act; 12 U.S.C. 2277a-10 or the System institution being 
placed into conservatorship or receivership; and
    (4) A System institution or IRP making a request pursuant to 
paragraphs (a)(1) through (3) of this section shall demonstrate that it 
is not aware of any information, evidence, documents or other materials 
which would indicate that there is a reasonable basis to believe, at 
the time such payment is proposed to be made, that:
    (i) The IRP has committed any fraudulent act or omission, breach of 
trust or fiduciary duty, or insider abuse with regard to the System 
institution that has had or is likely to have a material adverse effect 
on the institution;
    (ii) The IRP is substantially responsible for the insolvency of, 
the appointment of a conservator or receiver for, or the troubled 
condition, as defined by applicable regulations concerning the System 
institution;
    (iii) The IRP has materially violated any applicable Federal or 
state law or regulation that has had or is likely to have a material 
effect on the System institution; and
    (iv) The IRP has violated or conspired to violate section 215, 657, 
1006, 1014, or 1344 of title 18 of the United States Code or section 
1341 or 1343 of such title affecting a Farm Credit System institution.
    (b) In making a determination under paragraphs (a)(1) through (3) 
of this section the FCA and the Corporation may consider:
    (1) Whether, and to what degree, the IRP was in a position of 
managerial or fiduciary responsibility;
    (2) The length of time the IRP was affiliated with the System 
institution, and the degree to which the proposed payment represents 
reasonable compensation earned over the period of employment and 
reasonable payment for services rendered; and
    (3) Any other factors or circumstances which would indicate that 
the proposed payment would be contrary to the intent of the Act or this 
part.


Sec.  1412.6  Permissible indemnification payments.

    (a) A System institution may make or agree to make reasonable 
indemnification payments to an IRP with respect to an administrative 
proceeding or civil action initiated by the FCA if:

[[Page 42612]]

    (1) The System institution's board of directors, in good faith, 
determines in writing after due investigation and consideration that 
the IRP acted in good faith and in a manner he/she believed to be in 
the best interests of the institution;
    (2) The System institution's board of directors, in good faith, 
determines in writing after due investigation and consideration that 
the payment of such expenses will not materially adversely affect the 
institution's safety and soundness;
    (3) The indemnification payments do not constitute prohibited 
indemnification payments as that term is defined in Sec.  1412.2(l); 
and
    (4) The IRP agrees in writing to reimburse the System institution, 
to the extent not covered by payments from insurance or bonds purchased 
pursuant to Sec.  1412.2(l)(2), for that portion of the advanced 
indemnification payments which subsequently become prohibited 
indemnification payments, as defined herein.
    (b) An IRP requesting indemnification payments shall not 
participate in any way in the board's discussion and approval of such 
payments; provided, however, that such IRP may present his/her request 
to the board and respond to any inquiries from the board concerning 
his/her involvement in the circumstances giving rise to the 
administrative proceeding or civil action.
    (c) In the event that a majority of the members of the board of 
directors are named as respondents in an administrative proceeding or 
civil action and request indemnification, the remaining members of the 
board may authorize independent legal counsel to review the 
indemnification request and provide the remaining members of the board 
with a written opinion of counsel as to whether the conditions 
delineated in paragraph (a) of this section have been met. If 
independent legal counsel opines that said conditions have been met, 
the remaining members of the board of directors may rely on such 
opinion in authorizing the requested indemnification.
    (d) In the event that all of the members of the board of directors 
are named as respondents in an administrative proceeding or civil 
action and request indemnification, the board shall authorize 
independent legal counsel to review the indemnification request and 
provide the board with a written opinion of counsel as to whether the 
conditions delineated in paragraph (a) of this section have been met. 
If independent legal counsel opines that said conditions have been met, 
the board of directors may rely on such opinion in authorizing the 
requested indemnification.


Sec.  1412.7  Filing instructions.

    Requests to make excess nondiscriminatory severance plan payments 
and permitted golden parachute payments shall be submitted in writing 
to the FCA and the Corporation. The request shall be in letter form and 
shall contain all relevant factual information as well as the reasons 
why such approval should be granted.


Sec.  1412.8  Applicable in the event of receivership.

    The provisions of this part or any consent or approval granted 
under the provisions of this part by the Corporation (in its corporate 
capacity), shall not in any way bind any receiver of a failed System 
institution. Any consent or approval granted under the provisions of 
this part by the Corporation or the FCA shall not in any way obligate 
such agency or receiver to pay any claim or obligation pursuant to any 
golden parachute, severance, indemnification or other agreement. Claims 
for employee welfare benefits or other benefits which are contingent, 
even if otherwise vested, when the Corporation is appointed as receiver 
for any System institution, including any contingency for termination 
of employment, are not provable claims or actual, direct compensatory 
damage claims against such receiver. Nothing in this part may be 
construed to permit the payment of salary or any liability or legal 
expense of any IRP contrary to 12 U.S.C. 2277a-10b(d).

    Dated: July 13, 2004.
Jeanette C. Brinkley,
Secretary to the Board, Farm Credit System Insurance Corporation.
[FR Doc. 04-16225 Filed 7-15-04; 8:45 am]
BILLING CODE 6710-01-P